August 6, 2014 / 11:11 AM / in 3 years

Fitch Upgrades Cableuropa to 'BBB'; Stable Outlook

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(The following statement was released by the rating agency) LONDON, August 06 (Fitch) Fitch Ratings has upgraded Cableuropa S.A.'s (Cableuropa) Long-term Issuer Default Rating to 'BBB' from 'B' and withdrawn its Short-term IDR of 'B'. The ratings have been removed from Rating Watch Positive and the Outlook on the Long-term IDR is Stable. The upgrade follows the completion of the acquisition by Vodafone Group Plc (BBB+/Stable) and reflects the application of Fitch's parent subsidiary linkage methodology and our view of the legal, operational and strategic ties that exist between the parent and newly acquired Spanish subsidiary. Fitch has also upgraded Cableuropa's senior secured debt (including the outstanding bonds at Nara Cable Finance and Nara Cable Funding II) to 'BBB' from 'BB-' and the group's unsecured bonds to 'BBB-' from 'CCC+'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Parent-Subsidiary Linkage Fitch considers the strategic and operational ties between Vodafone and Cableuropa to be strong, given the strategic importance of the Spanish market to Vodafone, the significant investment the parent has made in acquiring fixed line assets in Europe (including Cableuropa which was acquired for a cash sum of EUR7.2bn) and the importance we believe Vodafone is placing on being able to provide convergent services in its core markets. Operationally Fitch expects Cableuropa's network to form an important part of Vodafone's integrated network infrastructure providing backhaul efficiencies and the ability to offer fully convergent services. Legal ties are considered less strong given the absence of a parent guarantee of the acquired subsidiary's debt. Nevertheless, Fitch expects Cableuropa's debt to be refinanced at the parent level relatively quickly. Taking all of these factors into account we consider that the parent-subsidiary linkage is sufficiently strong to apply a "notched down" approach, with Cableuropa rated one notch below the parent at 'BBB.' Call Dates; Expected Bond Take-Out With the exception of the 8.5% secured notes due 2020, the call dates of Cableuropa's public debt have passed and can therefore be prepaid. Fitch expects that with the acquisition complete, Cableuropa's debt (both bank and bonds) will be prepaid and refinanced at the Vodafone level, as soon as practicable, generating significant funding cost savings. Notching of Outstanding Debt Despite the structured and secured nature of Cableuropa's secured debt, Fitch applies no notching to instrument ratings at this level. This is in line with our approach to funding structures of issuers with an investment grade rating and takes into account the likelihood that these instruments will be refinanced well ahead of contractual maturity. However, we have notched the ratings of the unsecured ONO Finance II debt down by one notch from the IDR given that 4.2x of EBITDA leverage (based on 1Q14 LTM figures) currently sits ahead of these bonds in the context of Cableuropa's standalone credit profile. Pressured Standalone Fundamentals With a DOCSIS 3.0 upgraded fibre network covering approximately 49% of Spain's primary homes and with 1.8 million unique customers, Cableuropa is sustaining its competitive position in a market affected by a weakened economy, high unemployment and tough competition. Residential fixed-line metrics are under pressure and a shift in the revenue mix towards wholesale and mobile has had a significant impact on reported EBITDA, with the 1Q14 EBITDA margin down 4.6pp yoy at 40.3%. Tough Operating Conditions in Spain The operating pressures described are having a tangible effect on Cableuropa's residential business with customers down 47,000, or 2.6% yoy at end-1Q14. Subscriber losses are not material and services per customer (2.9x in 1Q14) and average revenue per user (ARPU; EUR54.2) remain resilient, but customer attrition where the cable operator is the challenger telecom is unusual. Margin pressure driven by the changing revenue mix is increasing leverage with net debt/EBITDA of 4.9x at end-1Q14 (end-1Q13: 4.6x). Mobile Strategy Cableuropa launched its virtual mobile network operator (MVNO) service in 2011, wholesaling minutes from the incumbent Movistar's mobile network. Marketing a low-cost SIM-only product targeted at existing cable customers has led to rapid mobile customer growth to 1.3 million at end-1Q14. One of the most aggressive MVNO cable roll-outs in the sector, the pace of mobile revenue growth (1Q14 service revenues up 136% yoy), and margins reported to be in the 10% range are dilutive at the group level. The success of MVNOs in Spain has been highly disruptive to the established network operators, including Vodafone. Cableuropa's acquisition by Vodafone could change these dynamics; it may introduce a more rational development to the market. RATING SENSITIVITIES (Cableuropa) Negative: Future developments that could lead to negative rating action include: - Any negative rating action on Vodafone's ratings. - Evidence that strategic and operational ties between the parent and subsidiary are not as strong as currently believed. Positive: Future developments that could lead to positive rating actions include: - Any positive action in relation to Vodafone's ratings. - Improved legal ties, eg, the provision of a parent company guarantee for Cableuropa's debt. RATING SENSITIVITIES (Vodafone) Negative: Future developments that could lead to negative rating action include: - FFO-adjusted net leverage trending towards 3.5x - Pressure on free cash flow driven by EBITDA margin erosion, higher capex and shareholder distributions, or significant underperformance in the main operating subsidiaries Positive: Future developments that could, individually or collectively, result in positive rating action include: - FFO-adjusted net leverage below 2.5x on a sustained basis - Strong free cashflow generation with high single digit pre-dividend free cash flow margin (FY14: 9% based on statutory reporting) on a sustainable basis - Evidence of successful monetisation of the Project Spring investments, leading to an improved competitive position for Vodafone in its European operations The rating actions are as follows: Cableuropa: Long-term IDR upgraded to 'BBB' from 'B'; Stable Outlook Short-term IDR of 'B' is withdrawn Senior secured bank facility upgraded to 'BBB' from 'BB-' Nara Cable Funding Senior secured bonds: upgraded to 'BBB' from 'BB-' Nara Cable Funding II Senior secured bonds: upgraded to 'BBB' from 'BB-' ONO Finance II plc Unsecured notes: upgraded to 'BBB-' from 'CCC+' Contact: Principal Analyst David Weller Analyst +44 20 3530 1643 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria; 'Corporate Rating Methodology' dated 28 May 2014 and 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' dated 19 November 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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